New Jersey's budget solution hiding in tax loopholes: Opinion

JPMorgan Chase is one of many publicly traded American corporations that have subsidiaries in tax haven countries.2008 AP file photo

By Peter Skopec

It is difficult to describe our current fiscal situation as anything other than dismal. With the “sequester” now signed into law, automatic across-the-board federal spending cuts will begin slashing wasteful spending and public priorities — possibly including Hurricane Sandy relief efforts — with equal abandon. Meanwhile, New Jersey faces a $1.4 billion revenue shortfall, with state spending on the rise.

As The Star-Ledger correctly pointed out in a recent editorial (“To save tax loopholes, GOP causes crisis,” March 1), our tax code is riddled with loopholes — from unnecessary tax credits to frivolous deductions that benefit chiefly special interests and the wealthy, costing more than $1 trillion a year. This list should also include the loopholes that let many of America’s largest corporations and wealthiest individuals avoid paying taxes by hiding their income in offshore tax havens.

Closing these loopholes should be an obvious first step to lessen our budget woes at both the state and federal levels: Ending tax haven abuse would not only offset this year’s $85 billion federal sequestration cuts; it would also generate enough revenue to bridge the $1.4 billion New Jersey state revenue gap. Twice. Should we really cut food safety, law enforcement and education while the nation’s largest, most profitable corporations and wealthiest individuals use loopholes to avoid paying the taxes they should owe?

Many American corporations and wealthy individuals use complicated accounting tricks to take advantage of loopholes in the tax code, moving their U.S. income to shell companies and accounts in tax havens such as the Cayman Islands. They pay little or no taxes on those funds, leaving the rest of us to pick up the tab. Each year, the U.S. Treasury loses an estimated $150 billion in revenue to offshore tax havens.

This tax-dodging contributes to our state’s budget crisis, as well. According to a recent NJPIRG report, New Jersey taxpayers lost more than $2.8 billion to offshore tax havens last year — making New Jersey the third-greatest state-revenue loser in the United States, behind only California and New York.

That’s enough money to repair Hurricane Sandy’s damage to New Jersey’s gas and electric utilities systems, to fix NJ Transit’s trains and equipment, and to make up for the projected drop in state revenue caused by the storm combined.

Unfortunately, the use of tax havens has become standard practice in corporate America. At least 83 of the 100 largest publicly traded American corporations have subsidiaries in tax haven countries. That includes Bank of America, Goldman Sachs, Wells Fargo and JPMorgan Chase — banks rescued by bailouts in 2008, courtesy of American taxpayers — which use a total of 551 offshore subsidiaries to avoid taxes.

Microsoft’s creative accounting offers a classic example of how these schemes work. Over a span of three years, Microsoft avoided $4.5 billion in federal income taxes by selling some of its intellectual property rights to a subsidiary in tax-friendly Puerto Rico. This allows Microsoft to pay that subsidiary 47 percent of the revenue from its American sales, moving these profits offshore — even though the profits came from products that were developed and sold in the United States. It’s all technically legal, but it’s definitely not right.

It’s time for this free ride to end. These companies benefit from our nation’s educated workforce, infrastructure and security, yet they do everything they can to avoid paying their share. When corporations avoid paying taxes, they shift their tax burden to the rest of us, forcing us to make up the difference through cuts to public services, by growing the deficit or by increasing taxes on everyone.

Closing offshore tax loopholes should be at the top of every lawmaker’s list, whether they serve in Congress or the Statehouse. With serious budget challenges facing us at the federal and at the state level, there has never been a better time to end offshore tax-dodging.

Peter Skopec is a program associate at the New Jersey Public Interest Research Group.